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Dec 19, 2014

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Home » Education » The Many Applications of the Moving Average – Part 7 (of 7)

The Many Applications of the Moving Average – Part 7 (of 7)

7) “Smoothing Out” other Indicators ie. Stochastic Oscillator:

The construction of the Ichimoku shows that we don’t have to use the MA of the close price. In fact if you think about what the moving average really is, it is simply a look at a series of data and smooths them out. Therefore, another use of the MA is to smooth out not only price data, but indicator data. For example, the stochastic oscillator uses a smoothing out process in its calculation:

Here is the formula as well as an image of the stochastic oscillator copied from the FXTimes glossary:

When plotted on a chart, the indicator is usually plotted as 2 lines: %K and %D. %K is the main (fast) line and %D is the signal (slow) line.

A component of the stochastic formula is as follows:

Fast %K = ((Today’s Close – Lowest Low in %K Periods) / (Highest High in %K Periods – Lowest Low in %K Periods)) * 100
%D = 3-period simple moving average of Fast %K (This basically smooths out the Fast%K line)

The stic Oscillator is calculated by the formula:

Fast %K = ((Today’s Close – Lowest Low in %K Periods) / (Highest High in %K Periods – Lowest Low in %K Periods)) * 100
Slowing %K = N-period moving average of Fast %K
%D = N-period simple moving average of Slowing %K

You can see in the example that the “full” stochastic has a smoother, rounder path, while the “fast” stochastic has a more jagged one.

Stochastic Oscillator

Note: technical indicators are all derived from price data.

 

1) As an indicator of general trend relative to price
2) As an indicator of general trend based on the 2 different moving averages
3) Other multiple moving average systems

In construction of other indicators:

4) MACD
5) MA envelop – Bollinger Band
6) Horizontal shift; in Ichimoku Charts
7) “Smoothing Out” other Indicators ie. Stochastic Oscillator

NEXT: Channels, Bands, and Envelops (Intro)

 

Fan Yang CMT is the Chief Technical Strategist FXTimes – provider of x News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.

 

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